Indie broker-dealers see few RIA breakaways

Executives at independent firms say they haven’t been losing many brokers to the investment adviser platforms.

DEL MAR, Calif. — Executives at independent firms say they haven’t been losing many brokers to the investment adviser platforms.
At a meeting of the San Diego-based National Association of Independent Broker/Dealers Inc. on May 8, executives from three independent firms said they hadn’t seen many brokers giving up the securities business to become pure investment advisers.
“We haven’t run into [broker movement] all that much,” said Jim Cannon, chief executive of AIG Financial Advisors Inc. of Phoenix.
A stand-alone investment advisory shop “may seem like the promised land,” he said, but brokers come to “understand that they’re better off if there’s someone standing behind them should something go wrong.”
Most broker-dealers allow reps to run their own RIA through the firm, said Adam Antoniades, the San Diego-based president of Advanced Equities Inc. of Chicago and First Allied Securities Inc. of San Diego.
Unlike the brokerage parents of custodians such as TD Ameritrade Institutional of Jersey City, N.J., and Schwab Institutional of San Francisco, independent brokerage firms don’t compete with their reps for clients, he said.
And “a lot of [brokers] still want to do transactions,” said Ismael Manzanares, chief executive of Madison Avenue Securities Inc. of San Diego. These reps don’t want to give up their securities licenses, he said.
The three executives appeared on a panel together.
They all supported stricter oversight for investment advisers and expected that, once the regulatory playing field is leveled, their firms will face less of a competitive threat from the advisory industry.
A leveling of rules “will be a key turning point,” Mr. Antoniades said.
The [broker-dealer exemption rule] “is making people take a look [at the different oversight] standards,” he said.
That SEC rule, an exemption from the Investment Advisers Act of 1940 for fee-based brokerage accounts, was thrown out by a U.S. appeals court in March.
The SEC on May 14 said that it will not appeal the court’s decision.
Mr. Antoniades insisted that brokers already are held to a high standard in handling investor dollars.
Separately at the conference, LaRae Bakerink, chief executive of WBB Securities LLC of San Diego, pointed to an RIA fraud case announced by the SEC last month against Albert Parish of Sommerville, S.C., formerly a vice president of an advisory firm.
The SEC claims that Mr. Parish told investors he had $134 million in investment pools even though he had no meaningful assets in the accounts.
Ms. Bakerink said that the NAIBD plans to use the case to show regulators why investment advisers need closer oversight.
Broker-dealer firms are challenged in having to supervise their reps’ outside RIA activities, the executives said.
“You better be getting an electronic [account] feed” from outside custodians, Mr. Cannon said to the audience of fellow broker-dealer officials.
He said his firm tries to pass along some of the costs for that technology to the field force.
Small can be beautiful
The executives acknowledged that running a firm with just a handful, or several dozen, reps is a challenge. But they insisted that there was a place for the little guy.
Be “nimble,” Mr. Manzanares said. “With a larger firm, to get it to move is very time-consuming.”
Many brokers want a family atmosphere where their needs will be accommodated, Mr. Manzanares said.
Still, most small dealers barely make money.
Mr. Cannon said that small firms often run at a loss or at best achieve 1% to 2% profit margins.
“I think you have a challenge,” he told the attendees. “You’ve got to be real smart about hiring and firing [brokers]. You can’t afford to have a bad apple.”
Small firms don’t get revenue sharing from product sponsors — often the difference between profit and loss for the larger independent firms, the executives said.
Will small dealers be able to survive?
“We’ll see some fallout of small firms burdened with the costs,” Mr. Antoniades said.
The big challenge, he said, is the “trend of [regulators] focusing on letter of the law instead of the spirit of law.”
“But there is absolutely room for a small broker-dealer,” Mr. Antoniades said. “Reps come from all walks of life,” and many don’t want to work in a larger company.
Small firms will thrive “due to consumer demand for objective advice versus the traditional [wirehouse] firm bound by its product line,” Mr. Cannon said.